Brazil’s Economic Crisis and the Future of BRICS Countries

August 10, 2017

In hosting the World Cup in 2014 and the Olympic games in 2016, the Brazilian economy may appear to be on the up-and-up. Once the booming center of Latin America, Goldman Sachs economist Jim O’Neill thought Brazil worthy of the now-famous “BRICS” moniker in 2001, placing it among economic powerhouses Russia, China, India, and South Africa. [1] As of late, however, Brazil has suffered a fall from grace; 0.1% GDP growth in 2014 followed by 3.8% and 3.3% declines in 2015 and 2016 respectively. [2]

The combination of falling commodity prices and detrimental government policies are to blame for this downturn. Government deficits have ballooned largely due to increased spending on pensions and tax breaks for choice industries. The growth of public debt has only been accelerated by high interest rates, leaving the Brazilian central bank in a quagmire; that is, lowering rates will likely exacerbate the nation’s existing high inflation. [3]

A plausible shot at recovery involves export promotion. Though Brazil’s export prospects fell when commodity prices declined in 2014, the weakening Brazilian peso has allowed Brazilian manufacturing to become more competitive – an unintentional benefit of persistently high inflation. [4] The International Monetary Fund found Brazil’s real effective exchange rate declined by 18.7 percent between December 2013 and April 2016, resulting in year-over-year Brazilian export growth. [5] However, the rebound of Brazilian manufacturing has been antagonized by one of the most complicated tax codes in Latin America as well as strong labor protections and a nation-wide 90% increase in the real minimum wage since 2006. [2] Brazil’s ranking of 123rd in the World Bank’s ease of doing business index puts it at a distinct disadvantage in global markets, especially compared to another manufacturing giant in Latin America, Mexico, which is ranks 47th. [6]

Even if Brazil wins in its up-hill battle of promoting manufacturing exports, it is unclear if it will be enough to offset other economic shortcomings. For example, rising unemployment from around 6 percent in late 2013 to above 13 percent as of February 2017 has beleaguered the growth of private consumption, which noticeably began to slow down in late 2014. [7] In addition, high inflation and credit downgrades from Moody’s and Fitch have also contributed to stagnating foreign direct investment. [8][9]

At the center of this crisis is for President Dilma Rousseff. Aside from bearing the blame for Brazil’s fiscal mishaps, she has also been accused of concealing the alarming state of the deficit from the public and taking place in a bribery scandal involving a state-owned oil company. Brazilian voters, enraged by a landscape of wide-spread political corruption, sought revenge. Impeachment petitions resulted in the Senate finding Rousseff guilty of breaking budget laws in August of 2016. Consequently, Vice President Michel Temer assumed the presidency and has remained there since. [10]

To some, Brazil’s economic crisis and political upheaval signal the fall of Brazil as one of the vanguards of economic growth in the early 21st century. When viewed with slowed growth in China and recessions in Russia and South Africa, one might see Brazil as just another BRICS in the wall of disappointing growth among emerging economies. [11] Though most do not dispute Brazil’s state of affairs as disappointing, it is unclear if it is indicative Brazil’s future long-run potential. After all, it does appear that Brazil is positioned make a successful recovery as 2017 GDP is expected to be above zero as Brazilian exports have continued to increase. [12]

Recently, investors seemed to have regained faith in BRICS countries as Brazil has begun to rebound, Russian oil prices have stabilized, India has led a series of economic reforms, and China’s currency has strengthened. [13] After all, the growth of emerging economies has continued to outpace developed nations, which is the very reason for the unique “BRICS” classification. The time since 2015 marked the first significant divergence in the growth rate trends between developing and developed countries; since 2015, emerging economy growth rates increased from 4 to about 4.8 percent, while developed nations have declined from 2 to about 1.7 percent. [13] Not only does this appear to be a return to BRICS countries norms, it also signals increasing investment opportunities compared to developed nations.

Despite tough times in recent years for BRICS nations – and Brazil in particular – it does not appear that their long-run growth potential has been stifled. With perhaps the exception of an increasingly politicized Russia, large emerging economies appear to be in an opportunistic position to capture the preponderance of global economic growth in the near future, especially as they continue to pursue free trade efforts. [14] If O’Neill was correct in noticing their long-run growth potential, it appears that recent events may have been but a pothole in the BRICS nations’ race to the top.

Student Blog Disclaimer

The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

[10] Simon Romero, “Dilma Rousseff Is Ousted as Brazil’s President in Impeachment Vote,” The New York Times, August 31, 2016. https://www.nytimes.com/2016/09/01/world/americas/brazil-dilma-rousseff-impeached-removed-president.html

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<h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>

<h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> ﻿Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>